Compliance in Progress Summary

The most recent comprehensive account of the Czech Republic’s performance against fiscal policy transparency standards is a report published by Oxford Analytica in 2006. It delivers an overall rating of "compliance in progress," unchanged from the previous year. Reform efforts, further inspired by the Czech Republic's successful bid to join the European Union, have led to a high degree of transparency in the budget process. Fiscal data submitted to the International Monetary Fund (IMF) with regard to the Special Data Dissemination Standard (SDDS) meets or exceeds specifications. Progress continues in the Czech Republic's transition from a socialist to a capitalist-style economy with a reduction in extrabudgetary funds and ongoing efforts to close the remaining funds in upcoming years. The result should be greater governmental consolidation and greater harmonization of accounting and reporting standards. The International Budget Project scores the Czech budget process as significantly open, with a rating of 66 percent. A sharp economic contraction in 2009 (forecast to be -4.3 percent by the IMF) has led to a fiscal deficit greater than previously anticipated. However, the Fund believes that the Czech Republic is making the reforms necessary to improve the country’s medium-term fiscal outlook.

General Overview

The most recent comprehensive account of the Czech Republic’s performance against fiscal policy transparency standards comes from a report published by Oxford Analytica (OA) in 2006. It accords an overall rating of "compliance in progress." The report states that the Czech Republic is "in compliance with the highest international standards" (p. 116), but adds that political considerations have stalled further progress toward the consolidation of certain fiscal transparency gains. One major initiative, the elimination of extrabudgetary funds, continues on schedule. Two funds were liquidated in January 2006, and there were plans to eliminate a third (the Czech Consolidation Agency) by the end of 2007. A review in December 2009 of the Ministry of Finance (MoF) website confirms that this latter fund was indeed terminated. Beginning in 2006, European Union (EU) fund receipts were included in the budget, but there have been complaints that data retrieval and clarity are insufficient. The OA report finds that the Czech national accounts are not yet fully compliant with the accrual-based methodology of the 1995 version of the European System of Accounts (ESA95), yielding troublesome data discrepancies. Progress has been made in improving forecasting credibility, as the government has made it significantly harder for budgetary entities to push their expenditures forward into out-budget years. OA adds that at the time of the writing of the report, the government had plans "to amend the Act on Budgetary Rules in 2007, in order to prevent budget chapters from drawing any money from reserve funds, apart from EU funds aimed at financing specific projects" (p. 116).
In 2000, the IMF published an initial Report on the Observance of Standards and Codes (ROSC) dealing with Czech fiscal transparency, and issued updates of the original ROSC in each year from 2001 to 2004. As of the 2004 report, the IMF focused on the recent adoption of a medium-term fiscal targeting framework and observed that this "should significantly strengthen budget planning and execution" (p. 7). The 2004 Update also applauded the progress made in eliminating or transforming the extra-budgetary funds that had been created to ease the transition from a Soviet-style to a capitalist economy.

In its 2008 Article IV Consultation report (published in 2009), the IMF projected the Czech Republic’s deficit to be around 2.5 percent of GDP for 2009. The Fund supported the use of an additional fiscal stimulus if economic projections turned out worse than forecast. Also, the IMF “suggested measures which would boost demand while safeguarding medium-term deficit objectives such as more rapid implementation of EU-funded projects and temporary measures that are well targeted to vulnerable groups” (p. 21). Meanwhile, according to the 2008 report, Czech authorities plan to improve medium-term fiscal sustainability by modernizing tax administration, reforming health spending, and making regulatory changes to the system of private pensions.

The International Budget Partnership (IBP), an organization dedicated to evaluating fiscal transparency in countries throughout the world, gave the Czech Republic a score of 66 percent in its 2008 Open Budget Index (OBI). This score placed the Czech Republic in the category of countries that provide “significant information to the public” during the budget process, and represents a slight improvement from a score of 64 percent given by the same organization in 2006. IBP’s approach involves tracking eight separate budget documents that, according to the methodology section of the IBP website, represent “good practice criteria for public sector financial management” (p. 2). These documents are: Pre-Budget Statement; Executive’s Budget Proposal; Citizens’ Budget; Enacted Budget; In-Year Reports; Mid-Year Review; Year-End Report; and Audit Report. The IBP states that these criteria are similar to fiscal transparency guidelines developed by multilateral institutions such as the IMF, the Organization for Economic Co-operation and Development, and the United Nations. The Czech Republic makes available all of the budget documents except the Citizens’ Budget and Pre-Budget Statement. The IBP 2008 report states that Czech citizens have a “fairly comprehensive picture of the government’s plans for taxing and spending for the upcoming year” (p. 1). However, the report suggests that the Czech government could improve its fiscal transparency by including more details in its Year-End Report and making non-financial information related to expenditure for readily available.

The Principles

CPClarity of roles and responsibilities.

According to the 2006 OA report, the Czech Republic earned a rating of "compliance in progress" (p. 118) for this principle. The distinction between government and private sector, as well as the definition of the government's roles and responsibilities, are contained in the 1992 Constitution. The general government comprises the central, regional, and municipal governments. In addition, there are six remaining extrabudgetary state funds, although the number of these funds was much bigger in the past. The OA report also notes the existence of certain agencies created to facilitate the transition from the former communist regime to a more capitalist-style economy. Like the extrabudgetary funds, these agencies are not intended to be permanent. Unlike the extrabudgetary funds, they are not included in the general budget. The central government's fiscal operations are governed by the Act on Budgetary Rules (No. 218 of 2000), whereas the operations of the extrabudgetary funds are governed by their specific enabling legislation. Subnational governments are governed by their own acts, at least with regard to their spending, although the central government provides the bulk of their revenues and controls their indebtedness. Greater coordination of central government and extrabudgetary fund budgeting is a current goal, but the OA report suggests that this is not likely to be achieved in the short term. Revisions to the budgetary rules have enabled the ministries to carry allocations over from one year to the next in an effort to reduce wasteful spending, but the accounting of such activities has resulted in reporting discrepancies. The OA report notes that these discrepancies are an artifact of the cash-based accounting methodology currently employed for this data, and will be alleviated when the transition to an accrual-based methodology is complete. A further problem arising from this carry-over tactic is that it complicates fiscal forecasting. Amendments to the Act on Budgetary Rules are being considered that will address this issue. Ultimately, it is expected that budget chapters "will be completely forbidden from drawing any money from reserve funds, apart from EU money aimed at financing specific projects" (p. 119), according to the OA report.

In recent years, regional and municipal governments have been given greater fiscal responsibilities and discretion regarding expenditures, but they remain dependent on the central government for the bulk of their revenues and have limited independent revenue sources outside of borrowing. The OA report notes that the constitutional guarantee of municipal autonomy places limitations on the degree of fiscal control that can be exercised by the central government. When the MoF attempted to exert such control by setting national standards and spending ceilings that would affect public-private partnerships, the municipalities thwarted the attempted reforms through the Constitutional Court. One method used by the state to assert more effective control and transparency at the subnational level has been to require more extensive publication of fiscal data. According to OA, municipal bonds cannot be issued without the MoF approval, and the MoF is obliged to annually calculate debt-service limit indicators. The law permits the MoF to step in when debt limits are exceeded, but no formal sanctions are stipulated for such events. As the OA report notes, "the risk remains, therefore, that sub-national governments will end up in a vicious cycle of decreasing state subsidies and worsening indebtedness, which the state will in the end be forced to solve through a bailout operation" (p. 119). A section in the MoF is also responsible for administering EU funds destined for subnational entities. Since 2006, these allocations have been included in the state budget.

The OA report notes that the government and the Czech National Bank (CNB) consult regularly on economic policy. The MoF and the CNB maintain a cooperative relationship on issues of accounting, liquidity management, statistics, documentation, and the development of legislation pertaining to financial supervision. They also cooperate with regard to "euro adoption, financial regulation, and sharing of data on financial markets, as well as crisis management" (p. 120), OA notes. The privatization of state-owned enterprises (SOEs) is the responsibility of the National Property Fund (NPF), once an extra-budgetary fund and now a unit of the MoF. Income realized by the NPF from the sale of privatized SOEs is a part of the state budget, for use in environmental clean-up initiatives or to finance expenses related to the transition from socialism. A second privatization fund, the Land Fund, is slated for closure in late 2009, according to the OA report. However, a December 2009 check of the Land Fund’s website, including its own news archive for the previous two years, revealed no information regarding the Fund’s closure. Finally, a 2001 law created the Czech Consolidation Agency to handle bad loans during the transitional period. This agency was originally slated for closure in 2011, but the MoF website reports that the agency was closed at the end of 2007 with its activities taken over by the MoF.

According to the OA report, "there are some instances where the line between the government and the private sector remains blurred" (p. 121). These center largely on the remaining nonprivatized SOEs. While privatization continues, certain SOEs -- such as the Post Office -- are likely to remain in government hands until major restructuring can be achieved. There has been a trend toward increased reliance on public-private partnerships (PPPs). This is facilitated by the passage of the Concessions Act of 2006, although at present it remains limited. However, OA notes that the Act fails to extend the MoF's supervisory authority over PPPs established at the regional and municipal level. The distinction between the public and private sector is further weakened by certain state controls on pricing, including rent controls, pharmaceutical prices, and municipal transportation. Comprehensive price deregulation is not a priority, although the OA report notes that a very gradual program of rent deregulation is currently being planned.

The budget process is governed by the 2000 Act on Budgetary Rules as amended through 2004. This Act mandates that the budget be based on a medium-term expenditure framework applicable to the central government and the extra-budgetary state funds. The Act requires that the framework include a specification of the circumstances (e.g., natural disasters, unanticipated fiscal crises, etc.) in which budget ceilings can be exceeded. OA notes that there have been suggestions that a formal mechanism is needed "to provide the medium-term expenditure framework with stronger enforcement powers" (p. 121). Subnational governments have their own budgetary rules, as do the extrabudgetary state funds. Taxes are governed by the 1992 Act on Administration and Collection of Taxes and Fees (No. 337 of 1992), and customs are covered by the 1993 Customs Act (No. 13 of 1993). Both the Tax and Customs Administrations maintain publicly accessible websites on which they publish a range of information. Reforms to the tax administration are under discussion in order to reduce the tax burden, but the OA report states that proposed reforms will probably not address the inefficiencies of the highly complex tax code.

In 2003, the IMF’s ROSC Update reported that Czech authorities were moving toward greater consolidation with regard to the budget, folding the countries extrabudgetary funds into the central government's operations. The IMF’s ROSC Update issued in 2004 added that a timeframe had been created for this consolidation, which should "broaden the scope of the state budget and improve expenditure management" (p. 2).

CPOpen budget processes

According to the 2006 OA report, the Czech Republic has achieved a rating of "compliance in progress" (p. 123) for this principle. Budget formulation is based on the provisions of the Act on Budgetary Rules, as amended through 2004. The budget is based on a statement of policy priorities accompanied by cautious projections of the underlying economic fundamentals. The OA report finds that the process by which the budget figures and priorities are determined was generally opaque, based on prior-year spending indices. Budgetary targets are "not always clearly identified" (p. 125). Under the 2004 Act, targets are treated as binding, and the medium-term framework includes consideration of all six of the state extra-budgetary funds. Current budget law prohibits changes in the established spending caps except in the case of unexpected changes in consumer prices, certain changes in taxes, changes in EU-funded project revenues, or unanticipated economic crises. However, extra-budgetary funds may reallocate funds or postpone spending in order to exceed spending limits. Since meeting the Maastricht criteria is an important goal leading to euro adoption, fiscal consolidation has become a priority for the Czech government. Thus, it participates in a Convergence Program, for which it publishes an annual report. This entails a statement of policy goals and priorities. To achieve consolidation, according to OA, the government will probably need to reform its pension and health funds, and efforts in this direction are ongoing. According to the IMF’s 2008 Article IV Consultation report, “recent health and parametric pension reforms should help reduce fiscal pressures” (p. 4). The MoF provides quarterly macroeconomic forecasting over a four-year horizon, but the process by which forecasts are modeled is not made public. The MoF does call upon the expertise of scholars and others in the public and private sector by hosting colloquia in which the macroeconomic framework is evaluated. According to OA, "the quality of the forecasts is deemed to be high and the conclusions are seldom contested" (p. 126). The revenue projections on which forecasts are based are regularly updated. Nonetheless, some have suggested that the MoF's forecasts are only weakly tied to projected revenues. The MoF publishes its projections on its website.

OA reports that the MoF prepares quarterly and biannual reports on implementation of the central government's budget, and notes that the data contained therein has improved in quality in recent years, although room for improvement remains. For instance, it does not report on tax spending. While subnational governments must prepare reports on their fiscal position for the MoF, these are generally unavailable to the public. State extra-budgetary funds are required to report to the MoF on a quarterly basis, but this data usually suffers from a two-month lag and is presented using a cash-based rather than accrual-based methodology. National accounts data is generally good, but the need to harmonize the data to the ESA methodology leads to occasional revisions. Depending on the data, methodologies include the standards from the IMF’s 2001 Government Finance Statistics Manual (GFSM2001) and 1995 European System of Accounts (ESA95), as well as the Czech "Fiscal Targeting Methodology." Financial accounts are produced by the CNB, while the Czech Statistical Office (CSO) compiles government sector and public finance statistics.

Reports on the execution of the state budget are produced monthly by the MoF, with commentary. According to the OA report, "the information is widely criticized as difficult to verify" (p. 129). Financial control and harmonization with EU requirements is conducted within the MoF through its Division of Internal Audit and Central Harmonizing Unit for Financial Control. The laws governing internal audits are the Act on Financial Control (No. 320 of 2001) and MoF Decree No. 416 (of 2004). By law the MoF is required to report annually on its internal control activities. These reports are posted on the MoF website. OA reports that work continues on the creation of an Integrated State Treasury System, which should facilitate "administering state finances and ensuring access to information on state revenues and expenditures in real time" (p. 129). Also ongoing is the MoF's transition from cash-based to accrual-based budget classification. The goal, according to the OA report, is to achieve full accrual-based reporting and compliance with the GFSM2001. However, the central and subnational governments still employ case-based accounting, and the six extra-budgetary funds use a combination of cash- and accrual-based accounting. The CSO compiles fiscal statistics consistent with ESA95 standards, as required by the EU.

Execution reports for extrabudgetary funds are published quarterly. The state's final accounts must be submitted to the parliament for approval. OA reports that current practice is for final account submission to occur within four months of the fiscal year's end. Monitoring general government finances is complicated by the Constitutionally-derived local government autonomy. Steps are being taken toward greater consolidation in fiscal reporting, and it has been recommended that the Supreme Audit Office (SAO) be empowered to extend its mandate to cover municipal audits.

The IMF's 2004 ROSC Update singled out a proposal to create a Reserve Fund that would cover state guarantees. This fund would receive its monies from the state budget, and would serve two purposes: "to hold the general government accountable . . . and to provide more flexibility in expenditure management in the year of guarantee call-in" (p. 5), the ROSC noted. A December 2009 review of a Czech government website dedicated to outlining the country’s roadmap for euro adoption confirmed that this fund had been established. In addition, the Update noted the amendment of the Act on Municipalities and the Act on Regions (passed in 2002), which explicitly removed responsibility for sub-national government debt from the state budget. However, the report noted that there appeared to be "a weakening of resolve" (p. 5) in this regard.

CPPublic availability of information.

According to the 2006 OA report, the Czech Republic has achieved a rating of "compliance in progress" (p. 123) for this principle. The MoF website provides fiscal data that meets or exceeds the requirements of the IMF's Special Data Dissemination Standard (SDDS) for coverage, timeliness, and periodicity. Nonetheless, OA states that the information is "not easily understood" (p. 123). Budget documents include current fiscal data, their guiding policies and underlying assumptions, plus data for the prior two budget years. In addition, the budget contains information on the income and spending for extrabudgetary funds, local-government transfer payments, intergovernmental grants, and state guarantees. Also included are the ministerial budgets, including agency breakdowns. The OA report finds an increasing trend toward accounting for individual project budgets, although thus far the data is not comprehensive. For the largest projects, details are provided, but more extensive program budgeting will take time. Monthly performance data for the state budget is provided by the MoF, with revenue and spending breakdowns. OA adds that "final accounts have to be published and presented for parliamentary approval within four months of the end of the budget year" (p. 123).

There is a legal requirement that the accounts of all levels of government must be made publicly available, but at the subnational level this does not always occur, according to the OA report. Even data produced independently by the MoF or other entities generally goes unpublished because "they fear possible legal action by local authorities" (p. 123), OA notes. OA cites this as the reason that the Organization for Economic Cooperation and Development has called for "further development of the public database of regional and municipal accounts" (p. 123). Because of the annual Convergence Program reporting requirement, data availability has generally improved, because these reports are available on the website of the MoF. Other reports, covering the government's current debt position, are produced by the MoF's Government Debt Management Unit and available on the website. The Unit's mandate has been expanded to cover the government's financial assets, about which it expects to produce comprehensive reports. The OA report and the IMF's SDDS website disclose that advance release calendars are publicly available, and the OA adds that "all data required by the European Union are submitted to Eurostat" (p. 124).

According to the OA report, fiscal risk derives primarily from state subsidies of development projects and from bad or low-quality assets held by public sector institutions. Government guarantees have declined since 2001, due to provisions in the Act on Budgetary Rules that mandate all guarantees be approved by both the executive and legislative branches of government. The Act also requires that all state guarantees be accounted for annually in a statement that is used during the budget preparation process. There are plans to create a "guarantee fund" that would cover a given year's guarantees, but it was not yet in place as of the 2006 OA report. Meanwhile, A 2007 IMF’s Selected Issues report mentions a “guarantee fund” that is currently being used “as a short-term fund for making payments on guarantees” (p. 18). OA did caution that "there is currently no universally accepted measure of fiscal risks in the Czech Republic" (p. 126). OA also expressed concern that the trend toward increased reliance on public-private partnerships would add to the risk posed by contingent liabilities. Both optimistic and pessimistic medium-term forecasting scenarios are generated, and a long-term forecast attempts to accommodate considerations of the trend toward an aging population, with its implications for pension costs and the increasing pressure for pension reform. OA notes that, up to now, pension reform has been focused on such technical details as raising the retirement age or providing tax incentives for voluntary pension plans. Less worrisome as a source of fiscal risk are fluctuations in the exchange rate, because the Czech Republic carries only minimal foreign debt. This is generally handled through hedging. In the past, subnational government defaults constituted an important source of risk, but 2002 amendments to the Act on Municipalities and Act on Regions has led to greater control in this area increasing the burden of responsibility on subnational governments. The OA report also notes that "there are no public, formal calculations of fiscal sustainability" (p. 127). The principal means of promoting fiscal sustainability is through restricting the individual budget units' latitude in altering their plans for expenditures. According to OA, the MoF formulates 10-year fiscal forecasts in which structural and cyclical influences are addressed. The Act on Budgetary Rules precludes the use of excess revenues to cover current spending, but sets no sanctions by which to punish noncompliance with budget ceilings. According to OA "no substantial progress was made during 2006 in terms of incorporating regional government authorities into the medium-term budgetary process" (p. 128). However, some of the larger municipalities employ a medium-term framework in establishing their budgets.

CPIndependent assurances of integrity.

According to the 2006 OA report, the Czech Republic earns a rating of "compliance in progress" for this principle (p. 131). OA reports that budget data is detailed and final accounts are reconciled against the accounts of the CNB. Government accounts are audited by the SAO, which reports its results to the legislature and executive branches. Transition to the accrual-based methodology of GFSM2001 is ongoing, and should improve fiscal transparency on completion. The 2007 Selected Issues report by the IMF confirms that the GFSM2001 methodology was implemented. The principal and constitutionally independent audit arm of the government is the SAO. Its head is chosen by parliament, subject to presidential appointment. The same is true for the SAO deputy. It is mandated to audit not only revenues and spending, but also budget performance. It does not conduct a government-wide annual financial audit, although it is empowered by law to do so. It does provide ad hoc commentary on budget reports, legislative drafts, ministerial and agency performance, and draft laws and regulations. Although the SAO is increasingly auditing performance, OA notes that "SAO audits still consist very heavily of ex post compliance control with an exclusive focus on budget execution . . . . and the organization intends to move towards more financial auditing" (p. 131). The SAO's scope of audits is limited by the Constitution, which accords autonomy to sub-national levels of government. SAO's audits are limited to the disposition of state subsidies. This situation is under discussion, however. Should the SAO's audit powers be expanded to local governments, OA warns that the task will be daunting, given the great number of municipalities that would be involved. A December 2009 check of the SAO’s website, however, revealed no mention of any jurisdiction over local governments. OA finds that the SAO "meets the standards of the Lima Declaration of the International Organization of Supreme Audit Institutions. OA notes that there is no framework in place to effectively follow up on recommendations arising from SAO audits. Certain state funds have internal audit procedures established within their legal charters (e.g. Social Security, Health Fund). Subnational governments are required by the MoF to conduct their own audits. The 2004 Act on the examination of Financial Management of Self-Governing Territorial Units and Voluntary Unions of Municipalities (No. 420/2004) establishes that the MoF audits regional-level entities, whereas municipalities are audited by their regional seat, unless they choose to pay for an external audit. Those municipalities that use bank credit are required to submit to independent audit. All subnational audit reports are reviewed by the MoF's Department of Financial Control. According to OA, "fairly substantial fines are imposed in the event of non-compliance" (p. 132). The Czech Republic is in the process of implementing EU-based requirements regarding public internal financial control, but the OA report notes that not all of the requisite laws are yet in place, and resourcing - in terms of staffing and training - is not yet fully adequate. When the reform program is complete, the SAO's audits should be more comprehensive, covering the whole of the government and based upon universal internal audits.

The principal statistical agency is the legally independent CSO, mandated to compile and process statistical data of national import. Like the SAO, the CSO's head is a presidential appointee. The CSO carries out statistical surveys of every governmental ministry, all of which must, by law, provide any data required by the CSO within a reasonable amount of time following the request. OA finds that "the quality of the data collected by the CSO is generally high" (p. 132). There are few significant reporting lags. However, the OA report states that the CSO may need greater resources to carry out its tasks appropriately, given the effect of budget cuts. The MoF provides nearly all fiscal data required by the CSO. The fact that MoF data are accrual based, whereas subnational entities and the six state funds still employ cash-based methods, leads to problems of comparison and cross-checking, according to OA. Further, OA notes that the level of cooperation between the MoF and the CSO showed improvement in 2006.

The IMF's 2004 ROSC Update reported on an expansion of capacity by the Supreme Audit Office that should facilitate its performance of "financial and 'value-for-money' audits" (p. 6). Increased staff training and the hiring of specialists are both means by which the Office hopes to achieve this goal. Local government accounts auditing has also been enhanced, according to the report, by the passage of a new act in 2004. The new act authorizes the MoF to conduct audits of regional entities and offers municipalities the option of free audits conducted by their regional authority or commissioning an external auditor to do the job. Regardless of who performs the audit, the reports must be submitted to the MoF for review. The MoF takes particular interest in municipalities that receive EU or other externally originated funds or are being monitored as a result of high indebtedness.

The 2002 Public Service Act governs the roles and responsibilities of members of the civil service, with the aim of improving professionalism. The Act is augmented by the government's Code of Ethics for Public Administration Employees, which covers issues ranging from abuse of authority to conflicts of interest at the level of the central government. For public-sector employees at the sub-national level, the governing legislation is the Act on Officials of Territorial Public Administration. OA reports that the legislation is in line with international standards and is backed up by measures "to monitor public service and to assess performance" (p. 121). OA adds that the Czech Republic is a member of the Group of States against Corruption (GRECO), a program of the Council of Europe. The OA report notes that although Czech law conforms to EU requirements, in practice "corruption remains a concern" (p. 122). The greatest problem was noted in the area of prosecution, which the OA calls "ineffective due to limited resources" (p. 122). Reforms in this area are in the works. For instance, a new law was approved, to be effective in 2007, which covers conflicts of interest. Individual ministries also have been required to develop specific anti-corruption programs. The Ministry of the Interior has overall responsibility to coordinate anti-corruption activities and has mounted a public anti-corruption awareness campaign.

In 2006, the law covering public procurement was revised with the enactment of a new Public Procurement Act (No. 137 of 2006). The new law has improved transparency in the procurement process, at least for large-scale contracts. As the OA report notes, the law establishes new procedures aimed at improving competitiveness in public contracting and requires that tenders be published through the Ministry for Regional Development. The aim of these reforms is to reduce what the OA terms "endemic" corruption in the procurement sphere, but the report suggests that the new laws are unlikely to have much impact. Whereas some improvement is noted at the national level, corruption on the subnational level of government procurement remains problematic. The OA notes that "the government is under no obligation to publish procurement contracts, as the nature of contracts between public and private entities would violate business secrecy" (p. 130). Nonetheless, public disclosure of such information can be required by a provision of the Concessions Act in certain situations.